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Wed, Mar 06, 2002 - Page 19 News List

Taking a look at some of the nonsense over pent-up demand

By Caroline Baum  /  BLOOMBERG , NEW YORK

The conventional wisdom holds that the US can't have a strong economic recovery because it didn't have a deep recession. Simply put, there is no pent-up consumer demand to impel spending.

No less an authority than US Federal Reserve Chairman Alan Greenspan gave credence to that view when he presented the Fed's semi-annual monetary policy report to Congress last Wednesday.

"Through much of last year's slowdown ... spending by the household sector held up well and proved to be a major stabilizing force," Greenspan told the House Financial Services Committee. "As a consequence, although household spending should continue to trend up, the potential for significant acceleration in activity in this sector is likely to be more limited than in past cycles."

Most economists subscribe to the theory of a lack of pent-up demand, and there is something intuitively appealing about it.

After all, if something doesn't go down, how can it bounce back? In a Saturday New York Times story recapping the surprising 1.4 percent increase in fourth-quarter real gross domestic product (revised from a 0.2 percent gain) and 6 percent increase in consumer spending, Wells Capital Management senior economist James Paulsen was quoted as saying: "If nothing else, there soon won't be anyone left who needs anything."

Is demand finite? With 94.4 percent of the labor force working, is consumer demand for restaurant meals, travel, entertainment, doctors, lawyers and insurance limited? What about the need or desire to trade in the five-year old clunker for a shiny new SUV? Maybe it's time to upgrade the dishwasher, improve the sound quality of the stereo system, and install one of those 50-inch TV sets.

"Estimates of demand are not a fixed number," says Joe Carson, an economist at Alliance Capital Management. "They tend to move up and down with changes in the economy, labor markets and financial markets. Whatever level of demand exists at the end of recession, it goes up from there."

Greenspan, Paulsen and the rest of the herd are focusing on the super-charged pace of auto sales in the fourth quarter. Driven by zero-percent financing, sales of motor vehicles and parts zoomed an annualized 81.3 percent in the fourth quarter.

As far as the Great American Dream is concerned, Greenspan et al are arguing that because housing never weakened, it can't very well come back. New and existing home sales set a record in 2001 of 6.26 million units.

Housing, or residential investment as it's called in the GDP accounts, is a very small portion of the total pie: 4.3 or 4.4 percent of GDP, according to Michael Carliner, an economist at the National Association of Homebuilders. For that reason, even when housing's going gangbusters, its contribution to GDP growth tends to be quite small.

For example, going back to 1972 to capture the recoveries from four recessions, two of which (1973-1975 and 1981-1982) were long and deep, there are only 11 quarters out of 120 in which housing contributed more than 1 percentage point to GDP growth.

Four of those were in the aftermath of the 1981-1982 recession. Housing starts bottomed at 837,000 in November 1981, almost tripling to an all-time high of 2.26 million in February 1984. Yet the biggest quarterly contribution housing ever made to overall growth was 2.11 percentage points in the third quarter of 1983.

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